What is Capital Gains Tax?
When put in simpler terms, any gain or profit that comes from the trade of a ‘capital asset’ is a capital gain. The benefit or profit inherited falls under the category – income. Hence, it is fundamental to pay tax for the amount in the same year in which the transferal of the capital asset registration takes place. This transfer of tax is what we as capital gains tax that can be either short-term or long-term.
Capital gains apply to selling or buying property; Since this transfer only involves the transference of ownership and not selling of property, they do not implement inherited properties. Assets that come as gifts due to inheritance or will – does not fall under Income Tax Act. But, if the inheritor chooses to sell it, capital gains tax will be applicable. House property, vehicles, land, patents, buildings, machinery, leasehold rights, jewelry, among others, come under the examples of capital assets.
Types of Capital Gain
Indian governments define assets into short or long term based on the Income-tax Act, 1961. Depending on the period for owning an asset, profits on investment can be classified into;
Short term capital gain
Short-term capital gains tax refers to the tax imposed on gains made from the selling of an asset held for a government-set short time. The short time varies for various things. For instance, for a fixed property like house property, building, and land, the short term period was changed to 24 months or less from 36 months or less.
How to calculate short term capital gain
After considering the entire value of the asset, subtract the expenses acquired in association with the transferal. Moreover, deduct the price of improvement and acquisition expenses. The remaining amount comes under short-term capital gain, which will fall under STCG.
Assets that draw short term capital gains tax
If you hold following assets for 12 months or less, they come under short-term capital assets.
- STCGT on shares: Shares or equity in a renowned company listed on BSE or NSE or any other approved stock exchange.
- Zero-coupon bonds are both valued and unvalued.
- Units of UTI, even if not valued.
- Securities such as bonds, govt securities, debentures, among others, are registered on the stock exchange in India.
Tax Rate of short term capital gains
After the categorization of assets as short term, an individual has to view the tax rates that fit. If securities transaction tax is applicable on a property, then the government would apply 15%* short-term capital gains tax. Furthermore, during taxation, when securities transaction tax is not applied, the government adds the SCTG to the income tax return. Accordingly, the taxpayer has to pay the amount as per the income tax slab.
Long term capital gain
The tax imposed on gains made from the selling of an asset held for a government-set long time is called long-term capital gains tax. The tax generated for assets such as share-oriented products or real estate comes under the category of long-term capital gain.
How to calculate long term capital gain?
Long term capital gain is applied at 20% for debt funds, real estate, and other assets after providing the taxpayers the advantage of indexation. Secondly, it is 10% for units of UTI/stocks/equity mutual funds/zero-coupon bonds/listed bonds.
Assets that draw long term capital gains tax
The definition of LTCGT differs for different types of products. For instance, it is two years for housing property, one year for units of UTI/zero-coupon bonds/equity mutual funds/listed debentures or govt securities/stocks, and three years for debt funding or any other assets.
Capital Gains Tax Exemptions
One can maintain Capital gains tax exemptions either partially or fully. For instance, if the buying cost is Rupees 80 lakhs and the selling cost is more than Rupees 1 crore (i.e. a profit of Rupees 20 lakhs). Additionally, a deposit of Rupees 50 lakhs is done, then as per the exemptions allowed by the Indian government, half the capital profits will go in the exemption. The government will apply the tax only on the other half.
Section 54:
If you use the selling price of a housing property to buy another housing property, then the capital profits on the sale will be under an exemption. However, there are always terms & conditions that have to be followed;
- One must make the new purchase of the housing property either one year before trading the old possessions or in two years of the trade.
- If the property is under construction, then the construction must complete within three years of the transfer period of the old possessions.
- One cannot trade the newly procured assets further within three years of acquisition or production.
- The newly procured capital should be within in India.
Section 54F:
If you are selling an asset such as agricultural land, valuable artifacts, jewelry within 10kms of a place, then you can use the benefit of section 54F. Section 54F rewards a reduction for the acquisition of real estate from the profits of the trade of any capital asset. Read on the following terms & conditions for section 54F;
- One must make the new purchase of the housing property either one year before trading the old possessions or in two years of the trade.
- If the property is under construction, then the construction must complete within three years of the transfer period of the old possessions.
- One cannot trade the newly procured assets further within three years of acquisition or production.
- The newly procured capital should be within in India.
- The person should be viable of only one housing property on the transfer date.
- The person should not purchase any other property within one year of the transference or built within three years of the transference.
As a part of the capital gains account scheme, the investor can transfer the profits before the scheduled date for registering returns. This step will be beneficial in availing of the benefits of the above-mentioned sections. These sections are useful even if a person has not bought a housing property; but, make sure to transfer or construct the property in the specified period.
Section 54EC:
The REC (Rural Electrification Corporation) and NHAI (National Highways Authority of India) issued the Capital Gains Bonds that are suitable for exemption from capital profits tax of up to Rupees 50 lakhs. These exemptions have a term-end of five years and offer a fixed profit rate that is currently 5.25%. The interest rate on all the capital gains bonds is taxable.
Strategies for Capital Gains Tax
One should always carry out taxation in a legitimate procedure. This will efficiently reduce the entire tax return produced by an investment.
Usage of excess in capital damages by other methods:
One can move the capital damages ahead to succeeding years to discredit any interest in the future. This will help in decreasing a taxpayer’s expense burden.
Usage of Tax-Advantaged retiring schemes:
Under these plans, you can take out the retirement money and be in a lower tax section. The retirement money will also multiply in a tax-free zone.
Time Gains at the time of retirement:
Around the time of retirement, you should think about waiting till the time you quit working to trade valuable assets. If your retirement asset is low then the capital gains tax at the time of retirement will also be low. If you are lucky then you would not have to pay capital gains tax at all.
Think about the holding periods:
You should remember to make the new purchase of the housing property, one year before trading the old possessions. If you are selling the property a year after it’s possession, then make sure to find out the original trade price of the property. These strategies will come in handy at the time of larger trades than the smaller ones. Also, it will be beneficial if you fall under the higher tax bracket instead of the lesser ones.
Conclusion
There are only a few methods that are aforementioned by which a person can decide to save the capital gain tax on any property. One way to both decrease inequality and increase revenue is to change the assessment of capital gains. Another way of the leading proposals is to charge capital gains as they accumulate rather than waiting to sell out the property.